ECB Starts Expectations Anchoring Campaign

By IBT Staff Reporter On 04/15/09 AT 9:23 PM

It looks like the Euro-area is in an “expectations anchoring” campaign about their future monetary policy. Today, council member Axel Weber said that the he does not see the key interest rate below the 1% benchmark.

“Being the Chairman of the biggest European central bank, Axel Weber certainly has a lot of influence in the voting council,” TheLFB-Forex.com Trade Team had said. “Additionally, the ECB was built on the Bundesbank legacy, something that gives even greater influence to Weber,” they added.

Anchoring expectations was a technique used very often by the Bundesbank, and now the ECB is relaying on the same instruments. As such, Weber’s comments can be relied upon, especially when other voting members have said in the last few weeks that the ECB is not likely to go below 1%.

The problem the ECB is facing right now is that the bank’s deposit rate is at too low a level, something that may hurt the inter-banking market. Banks that have excessive overnight cash have two primary options either lend it to another bank or deposit it at the ECB’s facilities. Weber sees that if the key interest rate falls below the 1% benchmark, banks will refuse to lend the excessive reserves simply because the transaction costs will be too high.

TheLFB-Forex.com Trade Team notes that if Mr. Trichet announces that the central bank will not cut interest rates to less than 1%, the single-currency might receive a boost. Currently, the ECB is the only major bank that appears reluctant to reduce the interest rate below the 1% threshold.